Personal Finance.

Dialing For Dollars

Prepaid Telephone Cards Offer Opportunities For Rewards And Risks

Not many people know what they are, but the telephone industry is hitching its wagon to prepaid phone cards-perhaps the fastest-moving vehicle on the much ballyhooed information superhighway.

Since the beginning of the year, prepaid telephone cards-a debit card for long-distance calls-have been issued by the millions by the big names in long distance as well as banks and entertainment companies. And although using prepaid cards for calls has long been common in other countries, the business is in its infancy in the United States.

What are prepaid phone cards? They're plastic squares that bear an 800-number and a personal identification number. By dialing the toll-free phone number and punching in your PIN, you gain access to an account that entitles you to a number of minutes of phone time, set when you buy the card. A company that charges 50 cents per minute will provide you with 20 minutes of phone time when you buy a $10 prepaid card, for example.

Some phone-card companies also offer additional cardholder services-paid for in units of phone time-that range from faxes and voice mail to phone-sex lines.

"I am convinced that every grocery store, convenience store and gas station will be selling prepaid calling cards within the next 12 months," says Terry Macko, director of Phone Cash marketing at MCI in Arlington, Va. "They are taking off as an entirely new retail category."

Virtually all the major phone companies have issued cards in the last nine months as well as many Baby Bells.

Colorful images on cards

There are Elvis Presley and Marilyn Monroe phone cards as well as those bearing images of everything from Felix the Cat to Degas and Van Gogh paintings. There are cards for nature lovers with scenic images and photographs of zebras, monkeys, polar bears and ferrets. And there are plain "use" cards that offer phone time, but no pretty images. You use the time in the card account and throw it away.

And then there are the advertising possibilities, says Marc Ostrofsky, president of MultiMedia Publishing, which launched a magazine called TeleCard World for phone-card collectors early this year.

For $1 or $2 per unit, you could put a plastic card, bearing your company logo, in the wallets of prospective clients, Ostrofsky says. The clients would carry the card because it provides something of value-discounted or free phone time. And each time the client uses the card account, he or she would hear a message tailored to sell your company's image or products.

With technological advances and increasing competition, the card's promoters see advantages for everyone.

For instance, phone companies like prepaid accounts because you pay in advance. They don't have to send you a bill or worry that you'll exceed your budget and be unable to pay. Meanwhile, non-phone companies can use them as advertising vehicles. For a few dollars a card, you can provide someone with a collectible bit of plastic that will deliver an advertising message every time it's used.

Some users of long-distance services like them because they're often cheaper than calling collect or using a phone credit card. And collectors like them because some of the rarer cards promise stunning appreciation potential. One of the first cards ever issued in the United States-a promotional giveaway with $1 in phone time-recently sold for $1,700.

Yet experts are beginning to voice concerns about the industry, which is largely unregulated. Some worry about con artists selling worthless card accounts and note that children can use them to get around "phone blocking" and other restrictions.

Moreover, since these cards can be purchased at supermarkets, buyers are largely anonymous. That could make prepaid calling cards a convenient vehicle for criminals and others-such as unfaithful spouses-who want to keep conversation records off their phone bills.

"It's the vast new frontier," says Barbara Esbin, assistant chief of the tariff division at the Federal Communications Commission, who spoke at a summer conference on prepaid cards. "As I looked out over the audience in June, it ranged from the Bell-heads to people you would expect to see selling watches on 42nd Street-and everybody in between."

Potential for fraud

Of particular concern to telecommunications regulators is fraud. Because consumers are buying calling time in advance, it would be possible to sell cards and skip town before anyone discovered that the 800-number that allowed people to access their accounts was non-existent or disconnected.

"There is a legitimate need and market for these cards, but at the same time there is a whole lot of opportunity for consumers to get hurt," says Ron Choura, deputy director of policy at the Michigan Public Service Commission in Lansing.

Adds Jim Lande, industry economist at the FCC: "Whenever somebody wants to talk about something as a business opportunity and a collectible at the same time, it's time to hold on to your wallet."